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Baroness Hollis of Heigham: I did not understand that there was such a time gap, and that the noble Lord suffered such jetlag, in moving from here to the Hague. Clearly that is how he occupies his early morning hours. He was querying his understanding of Clause 5(2)(a), but he is exactly right. It is about where the employer pays on his behalf to the pension scheme. It is in existing OPRA legislation.
Lord Higgins: I am so sorry, but I understand the matter even less than I did earlier. Subsection (2) states that:
which outlines the protection of benefits and so forth—
Baroness Hollis of Heigham: The noble Lord is referring to Clause 5(2)(a).
Lord Higgins: Let me start again. Subsection (2), set out on page 3 at line 9, states:
which is the subsection above, or perhaps it is the subsection below. The problem is that there are two subsections (1)(b). It is not clear which subsection is being referred to.
Baroness Hollis of Heigham: It refers to subsection (1)(b) above. It is a cross-reference back to subsection (2).
Lord Higgins: It is not made at all clear. There are two subsections (1)(b). I had assumed that subsection (2) refers to subsection (1)(b) above, but it does not say so. There is also a subsection (1)(b) below, but it cannot mean that because it refers to a stakeholder pension scheme.
Baroness Hollis of Heigham: Subsection (1)(b) above cross-refers back down to subsection (2), which is the subsection the noble Lord is dealing with.
Lord Higgins: I believe we are agreed that subsection (2), where it refers to subsection (1)(b), is to protect the benefits under personal pension schemes and so forth. It then specifies those who are to be the subject of the regulator's objective set out in subsection (1)(b) above; namely,
or stakeholder pension schemes. I do not understand why one of the objectives of the regulator does not apply to pension schemes in general. Moreover, I still do not understand the explanation given by the Minister about the meaning of "direct payment arrangements".
Baroness Hollis of Heigham: Clause 5(2) expands on the understanding of subsection (1)(b). I understand that there are personal pension schemes that are quasi- occupational schemes, into which the employer pays.
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That includes stakeholder schemes. This provision would establish that the regulator has an overview of such schemes.
Lord Lucas: I should like to know where this definition arises. To what do we refer in order to get a definition of "direct payment arrangements"?
Baroness Hollis of Heigham: They are set out in the Welfare Reform and Pensions Act 1999. The obvious case is where an employer pays a 5 per cent contribution into stakeholder personal pension. If the employee pays in 5 per cent, the employer hands over 10 per cent to the pension scheme administrators. This provision would cover that situation, which is a version of direct payment, thus bringing it within the remit of the regulator.
Lord Higgins: In that case, which pension schemes are not covered by it?
Baroness Hollis of Heigham: It would not necessarily cover some defined contribution schemes. The regulator will have two functions: protecting the security of the pension promise so far as defined benefits are concerned; and taking responsibility for ensuring that there is no fraud in all schemes. That function would include defined contribution, stakeholder and other schemes. The Pensions Regulator will undertake both functions.
Lord Higgins: I still do not understand why the protection of subsection(1)(b),
is then limited to those specified in subsection (2). If the objective of the regulator is to protect the benefit under personal pension schemes and so forth, which schemes are not covered?
Baroness Hollis of Heigham: I shall take a moment to check that I understand the point. There will be pension schemes where the employer makes no contribution whatsoever. The regulator has no remit to ensure that the conditions of the scheme are met because it does not exist. It is a private personal pension and is therefore not covered.
We are talking about schemes, of which hybrid schemes are an example, where the employer and the employee make contributions and the employer pays the total sum across to the pension scheme managers. The purpose of the provision is to make it clear that the regulator has only a limited role for personal pensions because the FSA looks after the regulation of personal pension providers. However, in so far as these are versions of workplace schemes to which the employer contributes, the remit of the regulator would extend to them.
Baroness Turner of Camden: As I understand it, this is where the individual himself pays for a personal pension and the employer makes no contribution. That case would fall outside the remit of the regulator.
Baroness Hollis of Heigham: You could have a situation in which a husband takes out a stakeholder
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pension for a non-working spouse. In that case it is clear that no contribution would be made by an employer. I do not see how that arrangement would be any business of the regulator.
Lord Lucas: I am having difficulty in finding the definition. If I could be directed to the right page, I would be most grateful.
Baroness Hollis of Heigham: Yes, indeed.
Lord Higgins: I had rather assumed that the Pensions Regulator would regulate all pensions, but obviously I am mistaken in that. Perhaps that is why I have delayed the Grand Committee unnecessarily. Can we be clear which pensions will not in any way come under the remit of the regulator?
Baroness Hollis of Heigham: I shall be happy to write to noble Lords at greater length on this point. The regulator will regulate what conventionally would be called defined benefit salary schemes; that is, occupational, workplace-based salary schemes. But also, where appropriate, the regulator will ensure that schemes to which the employer as well as the employer makes contributions and which are paid direct may also come within the regulator's protection. That is not necessarily in terms of the benefits that may accrue, because a defined contribution scheme does not guarantee the benefits that may accrue, but the regulator will provide protection against fraud, for example.
Essentially, the regulator will ensure that final salary schemes or, where appropriate, hybrid schemes that are workplace based and to which the employer on behalf of the employee makes contributions are sufficiently funded to meet the pension promise that formed part of the original pension contract. However, the Pensions Regulator will also take on wider functions, such as against fraud, where contributions are made by both the employer and the employee. But there will some pensions, such as my example in which a husband purchases a stakeholder pension for his non-working spouse, which are not workplace based and are therefore not in any sense the function of the regulator. However, if such pensions have been inappropriately sold, they may be the responsibility of the Financial Services Authority, to be dealt with under the remit of mis-selling. That is my understanding of the structure of the pension schemes. I am not quite sure why we are at odds on this point.
Lord Higgins: I do not think that we are at odds; it is merely a question of my being educated. I had mistakenly thought that, overall, the regulator was a pension regulator and would regulate all pensions. However, clearly that is not the case. As the noble Baroness has made clear, there is a division between the Pensions Regulator and the Financial Services
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Authority and, presumably, other bodies. However, it would be very helpful to have a note on which pensions are covered and which are not.
Baroness Hollis of Heigham: I thought that we had covered some of this in the briefing file I made available to Peers, but I shall check it and, if it is incomplete, I shall be happy to augment it.
Lord Higgins: I am most grateful to the noble Baroness.
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